Shares of Hydro One (TSX:H) show us that you don’t need to give up on capital gains when you’re playing defence. Undoubtedly, as a steady utility known for its “virtual monopoly” over Ontario’s transmission lines, you’re getting a level of predictability that’s hard to come by in the equity markets.
Sure, the beta, which currently sits at just north of 0.3 (which means H stock is likelier to “zig” when the TSX “zags”), isn’t the lowest out there, but shares of H are certainly one of the “sleep easy” types of stocks you’d be glad you held at your TFSA (Tax-Free Savings Account) portfolio’s core when things get a bit more turbulent.
Indeed, shares held their own far better than markets during the tariff scare in April, and they’ll probably be in a better spot than the S&P 500 come the next period of heightened investor anxiety.
Hydro One stock has slipped as the TSX Index shot to new highs
Of course, a low degree of correlation to the TSX Index doesn’t mean zero volatility. If investors get back into risk-on mode as the stock market races to new all-time highs, H stock could be in for a bit of a pullback as most other names surge higher.
In fact, H stock has suffered a mini-correction of sorts in recent weeks as investors rushed back in to buy the V-shaped bounce in markets. Indeed, the reaction shares of H, I believe, have more to do with shifting sentiment and a rotation out of value and back into the growth trade.
Either way, investors who’ve yet to rebalance may wish to take advantage of such a pullback in the defensive dividend stocks before the price of admission has a chance to go up again. Indeed, it’s far better to be prepared for a hurricane of volatility before you have a chance to feel the first gusts of wind.
Is the slight dip in H stock buyable?
As one of my favourite utility plays, I’d be inclined to watch every dip closely. At just over $50 per share, H stock doesn’t seem like all too big of a steal, especially since the name was a tad on the overheated side when it peaked in early May.
Though the 24.7 times trailing price-to-earnings (P/E) multiple isn’t egregiously expensive, I can’t say I’m in a huge rush to buy the latest 5-7% slip. The 2.62% dividend yield is on the lower end of the historical range.
So, unless you’re keen on playing defence for the rest of the year because you doubt this TSX rally’s sustainability, I’d wait for a retreat to the mid-$40 range, where there’s a stronger level of support. The stock is more or less fairly valued right here following first-quarter results that didn’t have much in the way of shocking developments (the firm is en route to hitting its targets for the year).
In short, Hydro One seems like a mild buy or a hold if you haven’t yet initiated a position. As markets heat up for the summer, it’s not hard to imagine some defensively positioned investors ready to get back into the growth trade, perhaps at the expense of the Steady Eddie stocks.
